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Home Depot (HD) Up 12.6% Since Last Earnings Report: Can It Continue?

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A month has gone by since the last earnings report for Home Depot (HD - Free Report) . Shares have added about 12.6% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Home Depot due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

The Home Depot Beats on Q4 Earnings, View Soft

The Home Depot has posted fourth-quarter fiscal 2020 results, wherein earnings and sales beat the Zacks Consensus Estimate and improved year over year. The company gained from the continued strong demand for home-improvement projects as well as its ongoing investments. However, it did not provide a specific outlook for fiscal 2021.

The company stated that it is difficult to predict the demand environment in fiscal 2021 due to the uncertainty related to the duration of the pandemic and its impacts on consumer spending. Based on the expectations that the demand environment prevalent in the second half of fiscal 2020 will continue throughout fiscal 2021, the company anticipates comparable sales growth of flat to slightly positive. Moreover, operating margin is expected to be at least 14% compared with 13.8% reported in fiscal 2020.

Q4 Highlights

Earnings of $2.65 per share improved 16.2% from $2.28 registered in the year-ago quarter. Excluding the one-time cost related to the acquisition of HD Supply Holdings Inc., adjusted earnings was $2.74 per share. The bottom line beat the Zacks Consensus Estimate of $2.63.

Net sales advanced 25.1% to $32,261 million from $25,782 million in the year-ago quarter and beat the Zacks Consensus Estimate of $30,655.1 million. Sales benefited from the continued robust demand for home improvement projects. The company is effectively adapting to the high-demand environment, driven by investments in its business over the years and the dedication of its associates to serve customers. Its overall comps grew 24.5%, with a 25% improvement in the United States.

In the reported quarter, comps were aided by a 10.8% rise in average ticket and a 12.8% increase in customer transactions. Moreover, sales per square foot rose 24%.

In dollar terms, gross profit increased 24% to $10,831 million from $8,736 million in the year-ago quarter, primarily driven by robust sales growth. Meanwhile, gross profit margin contracted 31 basis points (bps) to 33.6%.

Operating income increased 20% to $4,083 million, while operating margin declined 54 bps to 12.66%. Despite gains from the robust top line, operating margin was hurt by a gross margin decline as well as higher SG&A and other operating expenses.

Balance Sheet and Cash Flow

The Home Depot ended fiscal 2020 with cash and cash equivalents of $7,895 million, long-term debt (excluding current maturities) of $35,822 million, and shareholders' equity of $3,299 million. In fiscal 2020, it generated $18,839 million of net cash from operations.

In fiscal 2020, the company paid out cash dividends of $6,451 million and repurchased shares worth $791 million.

Moreover, it has raised its quarterly dividend by 10% to $1.65 per share. This brings the company’s annualized dividend to $6.60 per share. The hiked dividend is payable Mar 25, 2021, to shareholders of record as of Mar 11.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended upward during the past month.

VGM Scores

At this time, Home Depot has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with a D. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Home Depot has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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